Posts Tagged ‘Gold’

Monetary stimulus has driven M2 to $8.8 trillion for the first time in history, an inflationary signal….In response, Silver is currently at $26.80 per ounce, down from the peak of $29.00. Most don’t realize that the commodity was trading at only $$18 in August; a poor man’s play on inflation. Futures are also moving sharply to the downside, in anticipation of Bernanke’s speech in Frankfurt today, defending monetary easing.

According to Zero Hedge, seasonally adjusted M2 has just surpassed $8.8 trillion for the first time, hitting a record $8,802.2 billion, a jump of $16 billion on a SA basis. This is the 17th out of 18 consecutive weeks that M2 has increased. On a non-seasonally adjusted basis, M2 also jumped to a record high, hitting $8,765 billion, a jump of $56.9 billion W/W, and an increase if just over $100 billion in the past two weeks alone.

While the jump itself is not surprising as it comes in anticipation, and realization, of QE2 (we would love to have the semantic and highly theoretical debate of whether or not the Fed “prints money” but will focus on the practical for now), the last week’s components of the M2 change were odd to say the least. In the past week we saw both the biggest drop in commercial banks savings deposits in 2010 ($61.3 billion) and the biggest jump in demand deposits ($57.6 billion).

Whether or not this is due to the recently adopted unlimited guarantee by the FDIC on demand deposits is unclear, however as the chart below shows this is certainly a very odd move, and is indicative that there has been a notable readjustment in the bank deposit base. The surge in demand deposits brings the total to $536.2 billion, an increase of $94 billion from the beginning of the year. And despits the drop, savings deposits are also markedly higher compared to the start of the year: at $4,336.7 billion, $337.8 billion higher than at the end of 2009. Whether this is a pull driven transfer, as banks need to replenish their deposit basis is also unknown. We will keep a close eye on this, as such a major reallocation of bank deposit liquidity has not occured in over a year.

In other news, according to Zero Hedge, “Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently speechto be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, Bernanke considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China’s fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. As Albert Edwards summarized, the global game of chicken will continue until either China’s or America’s population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

Some choice quotes from Bernanke’s speech:

On how the US’s slower growth rate is threatening America compared to the rest of the world:

Since the second quarter of this year, GDP growth has moderated to around 2 percent at an annual rate, less than the Federal Reserve’s estimates of U.S. potential growth and insufficient to meaningfully reduce unemployment. The U.S. unemployment rate (the solid black line) has stagnated for about eighteen months near 10 percent of the labor force, up from about 5 percent before the crisis; the increase of 5 percentage points in the U.S. unemployment rate is roughly double that seen in the euro area, the United Kingdom, Japan, or Canada.

Of particular concern is the substantial increase in the share of unemployed workers who have been without work for six months or more (the dashed red line in figure 4). Long-term unemployment not only imposes extreme hardship on jobless people and their families, but, by eroding these workers’ skills and weakening their attachment to the labor force, it may also convert what might otherwise be temporary cyclical unemployment into much more intractable long-term structural unemployment. In addition, persistently high unemployment, through its adverse effects on household income and confidence, could threaten the strength and sustainability of the recovery.

On the USD exchange rate:

The foreign exchange value of the dollar has fluctuated considerably during the course of the crisis, driven by a range of factors. A significant portion of these fluctuations has reflected changes in investor risk aversion, with the dollar tending to appreciate when risk aversion is high. In particular, much of the decline over the summer in the foreign exchange value of the dollar reflected an unwinding of the increase in the dollar’s value in the spring associated with the European sovereign debt crisis. The dollar’s role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years.

On Bernanke’s view that despite hopes for decoupling, the US is still the most critical driving force and should be allowed to get whatever it desires. If that means an export-led boost (and a low USD) so be it.

Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

Bernanke’s direct attack on China:

Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.

On Bernanke’s virtuoso performance on the the world’s smallest violin:

The current system leads to uneven burdens of adjustment among countries, with those countries that allow substantial flexibility in their exchange rates bearing the greatest burden (for example, in having to make potentially large and rapid adjustments in the scale of export-oriented industries) and those that resist appreciation bearing the least.

And a direct confirmation of Edwards’ assumption that by allowing commodity price super inflation, Bernanke is in essence forcing China to revalue as the chairman knows that while the US may be expericing surging food prices, China is getting that too, and then some.

Third, countries that maintain undervalued currencies may themselves face important costs at the national level, including a reduced ability to use independent monetary policies to stabilize their economies and the risks associated with excessive or volatile capital inflows. The latter can be managed to some extent with a variety of tools, including various forms of capital controls, but such approaches can be difficult to implement or lead to microeconomic distortions. The high levels of reserves associated with currency undervaluation may also imply significant fiscal costs if the liabilities issued to sterilize reserves bear interest rates that exceed those on the reserve assets themselves. Perhaps most important, the ultimate purpose of economic growth is to deliver higher living standards at home; thus, eventually, the benefits of shifting productive resources to satisfying domestic needs must outweigh the development benefits of continued reliance on export-led growth.

Bernanke’s conclusion for how to spank China:

it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy.

And by global economy, Bernanke of course means banker interests. Also, where he talks about other stuff, all Bernanke really means is that China should unpeg already goddamit, so that the $5 trillion in debt that has to be rolled in 2 years can start getting inflated already, cause we are cutting it close, and only China is staying in the way. Next up: China’s response. Might be time to stock up on Rare Earth Minerals again.”

Today, Ben Bernanke defended his second economic stimulus package, using monetary easing to lower interest rates and spur both spending and lending. The first $2 trillion package apparently wasn’t enough, so now another avalanche of capital will flow into the United States economy and abroad. When criticized by China and other East Asian economies now being flooded with excess capital flows, Bernanke claimed that both growth and trade are not balanced and that emerging market currency pegs were to blame. Now begin the currency wars between the mature and emerging economies…can anyone actually win? Bernanke claims that emerging market growth will be stimulated as the developed nations recover; therefore, a weaker U.S. currency could be better for everyone. Only time, our inflation rate, and the price of gold will tell. (Paulson’s gold fund has certainly been on a tear…)

.
This video should provide some humor to the current situation. The section on Mr. Dudley’s role at Goldman Sachs is pretty revealing…

[youtube]http://www.youtube.com/watch?v=PTUY16CkS-k[/youtube]

According to Bloomberg, “Federal Reserve Chairman Ben Bernanke, took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in prepared remarks to a conference later today in Frankfurt. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics including Republican members of Congress have said it risks fueling inflation and asset bubbles.

“Globally, both growth and trade are unbalanced,” Bernanke said, with economies growing at different rates. “Because a strong expansion in the emerging-market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

Group of 20

While Bernanke didn’t identify China, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Obama attacked China’s policy of undervaluing its currency.

Bernanke said that the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

International Panel

The Fed released the text of Bernanke’s speech in Washington ahead of the address scheduled for at 11:15 a.m. Frankfurt time at a European Central Bank conference on monetary policy. He will then speak on a panel at 11:45 a.m. with ECB President Trichet, International Monetary Fund Managing Director Kahn and Brazil central bank President Meirelles.

In the panel discussion, Bernanke will say that “financial conditions eased notably in anticipation” of the Fed’s stimulus announcement, “suggesting that this policy will be effective in promoting recovery,” according to a text released by the Fed.

It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

Global Call

In the speech, Bernanke called on policy makers around the world to “work together to achieve a mutually beneficial outcome — namely, a robust global economic expansion that is balanced, sustainable and less prone to crises.”

German Finance Minister Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster-growing economies such as Brazil, Meirelles said in October.

Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

Jobless Rate

America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

China’s Criticism

China’s vice foreign minister, Mr. Tiankai, said Nov. 5 that “many countries are worried about the impact of the policy on their economies,” echoing concerns raised across Asia over stronger currencies and possible asset-price inflation.

Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

The comments echo views of Obama administration officials including Treasury Secretary Geithner, who said Oct. 6 that “it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems.”

Depression Lesson

Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.””